Our Chinese oil sands

Nexen could be just the beginning...

In June, the Alberta government launched a website publicly outing employers who haven't paid their workers—an online hall of shame. Among these "deadbeat bosses," as the media quickly dubbed them, the worst offender was a subsidiary of China Petrochemical Corp. (Sinopec), a Chinese state-owned oil giant. That same subsidiary, along with others, is facing charges after the deaths of two Chinese workers flown in to work on a site near Fort McMurray, Alta., in 2007. After much delay, the trial begins this fall.

It's the kind of bad press Chinese firms can't afford as they seek to buy up swaths of Alberta's oil patch and attempt to win over Canadian regulators and a wary populace. Last week, Chinese state interests went after two Calgary-based companies. China National Offshore Oil Corporation (CNOOC) Ltd.'s $15.1-billion bid for Nexen Inc. got the most attention by far: it's the biggest-ever takeover of a Canadian company by a state-owned entity. On the same day, Talisman Energy Inc. said it would sell a 49 per cent stake in its U.K. North Sea outfit to Sinopec for $1.5 billion. "Virtually overnight, Chinese investment in the energy sector has doubled to over $30 billion," says Wenran Jiang, director of the Canada-China Energy & Environment Forum. Although the deals have yet to be approved, it's a sign of things to come.

The proposed Nexen deal would be the latest—and by far the largest—in a string of acquisitions. Last fall, Sinopec bought Calgary-based Daylight Energy Ltd. for $2.1 billion, the first time a Chinese state-run company made a successful bid for a North American energy ﬁrm. Earlier this year, PetroChina bought Athabasca Oil Sands Corp., giving China its first full ownership of an oil sands project. The Nexen deal takes things to another level. It's worth more than all of China's direct investment in Africa in 2011 ($14.7 billion), according to Gordon Houlden, director of the University of Alberta's China Institute. Jiang says China's interest in Canada is ramping up partly because we've become more welcoming. Prime Minister Stephen Harper once vowed not to sell Canadian values to the highest bidder and bestowed honorary Canadian citizenship on the Dalai Lama, to China's chagrin; lately he's softened his stance. In January, after the U.S. rejected the Keystone XL crude oil pipeline from the oil sands to the U.S. Gulf, Harper courted the Chinese more aggressively, visiting Beijing to discuss oil sales as part of a trade mission. (With the vast majority of Canada's crude oil going to the U.S., he's said he's keen to diversify.) The controversial Northern Gateway pipeline, if approved, will tap into the surging demand in Asia.

If last week is any indication, China could quickly become a dominant—if not the dominant—player in Canada's oil sands. Many critics question the motives of state-run firms, which operate like other Western companies but ultimately answer to the Chinese government. Beyond that, China's markets remain largely closed to foreigners. On July 27, U.S. Democratic Sen. Charles Schumer wrote a letter asking Treasury Secretary Timothy Geithner to block the deal until China opens its markets. (Nexen has offshore holdings in the Gulf of Mexico, so the deal also requires U.S. approval.) "I urge you not to miss this opportunity—the largest foreign acquisition ever by a Chinese company—to hold China to the commitments it has made to provide a level playing field for U.S. companies seeking to access Chinese markets," Schumer wrote, calling the current investment relationship between the U.S. and China a "one-way street."

Other critics worry about whether Chinese companies will respect Canadian regulations on the environment and labour standards, where Beijing's track record remains notoriously poor. "Does it matter who owns the oil sands? You bet it does!" said Gil McGowan, president of the Alberta Federation of Labour, in a statement about Nexen. He argues that foreign governments would "develop the oil sands in their own best interests," keeping the best jobs for themselves, and ignoring Canada's energy needs and environmental priorities. McGowan has previously expressed concern about overreliance on temporary foreign workers in the oil sands, driving down wages for Albertans. The NDP, too, criticized the Nexen deal for lacking "hard commitments on the environment."

So far, at least, it seems that China's interest in our energy sector has been of benefit to both sides. Here, China has found a stable place to invest. Resource-rich and democratic, this country is undeniably attractive, and China has been burned in the past; in Libya, it had to evacuate more than 35,000 workers after civil war broke out, Jiang notes, losing $18 billion in the process. Nexen made an ideal target. It has considerable assets abroad, where the Chinese are also interested in expanding (just 28 per cent of Nexen production is in Canada). Nexen's stellar corporate image and brand reputation also make it appealing—Nexen was featured in Maclean's in May as one of Canada's top 30 green employers, its third year on the list.

Still, it's not hard to see why Nexen felt pressure to sell. The firm has been plagued by operational difficulties at its Long Lake oil sands project. "It wasn't creating value for shareholders, and its stock price wasn't performing well [relative to its peers]," says Lysle R. Brinker, director of equity research on integrated oils and national oil companies at I.H.S. Herold in Colorado. In January, Nexen removed CEO Marvin Romanow, and CNOOC swooped in. It offered an all-cash price of $27.50 per common share in its bid, a 61 per cent premium to Nexen's closing price on July 20.

This takeover is undoubtedly the best possible outcome for Nexen shareholders, but whether it's best for Canada is still up to regulators to decide. The deal now faces review by Industry Canada and the federal Competition Bureau. Even though Harper has insisted that "nothing should be assumed," experts agree this takeover will almost certainly go ahead.

First, though, it must be shown to have a "net benefit" to Canada, a condition that CNOOC has clearly considered. The company said it will put its North and Central American headquarters in Calgary, list its shares on the Toronto Stock Exchange, and hold onto Nexen's management and employees. "CNOOC looked at why Potash didn't go through, and made some adjustments," says Robert Schulz, professor in the University of Calgary's Haskayne School of Business, referring to BHP Billiton Ltd.'s $40-billion hostile bid for the Saskatchewan fertilizer company, which was withdrawn after regulators indicated there was no net benefit.

Foreign investment has long been a reality in the oil sands, but if the U.S. is the "devil that we know," China is the devil we don't, Jiang says. State-run companies still have to obey Canadian laws, pay royalties and taxes, just like any other company here. Jiang points to a poll from the Asia Pacific Foundation noting that a majority of Canadians feel uncomfortable with Chinese foreign direct investment. This anxiety stems "from concerns about human rights and democratic development, to product safety and Chinese defence buildup," notes Paul Evans, director of the Institute of Asian Research at the University of British Columbia. "There's not a deep knowledge about these Chinese state-owned enterprises and how they're conducting themselves."

China is the largest energy consumer in the world, and will use as much as 70 per cent more energy than the U.S. by 2030, says Jiang. What if Canada, in the face of deep economic troubles, decided that oil resources would be better used to benefit Canadian interests? It's not inconceivable. The country flirted with nationalization under Prime Minister Pierre Trudeau when he introduced the National Energy Program in 1980 to boost Canadian ownership and government revenues. Canadians rejected it in favour of a market-based system. "We need to make a choice: will Canada maintain its market-economy status, or convert our natural resources into a state-owned enterprise?" Jiang says. If we really are "open for business," China will continue buying from us.

The Nexen deal is "a tough first test," Evans says. If it gets the go-ahead, we'll see other state-owned companies—from China and elsewhere—wading in. How this will reshape Canada's energy sector is an open question. Among the opposing camps who either welcome the Nexen sale or view it with trepidation, one point is agreed upon: this is only the beginning. "If China now has the second-largest economy on earth, and is en route to number one, there may not be much choice but to deal, trade with and work with China," Houlden says.